(Bloomberg) -- Brazil central bankers said they have all the tools needed to tame an inflation pick-up in Latin America’s largest economy that’s driving analysts to question how effective their monetary policy really is.
Both outgoing Governor Roberto Campos Neto and his successor Gabriel Galipolo told reporters in Brasilia on Thursday that monetary policy will put inflation on a path to slow to the 3% target. The central bank will hike rates for as much and as long as needed to tame consumer prices, they said.
“We have all the tools needed to achieve our goal,” said Galipolo, who becomes governor next month. President Luiz Inacio Lula da Silva has given full “confidence and autonomy” to the board to carry out its mission, he added.
Central bankers lifted rates to 12.25% last week and pledged two more full percentage point hikes. Still, some investors are warning Brazil risks falling into a trap known as fiscal dominance, in which greater spending undercuts the impact of efforts to tighten policy with higher borrowing costs. The country is running an annual budget gap of about 10% of gross domestic product.
The bank has recently stepped into the currency market through spot and credit line auctions, trying to tame a strong outflow stoked by concerns that Lula will fail to strengthen public accounts. Campos Neto said that policymakers’ currency interventions had nothing to do with fiscal dominance.
“When there’s a perception of lack of fiscal credibility, the bank tries to gain as much monetary credibility as possible,” he said. “But we can’t act alone.”
The real is still down over 20% this year, the biggest decline among major currencies. At the same time, analysts surveyed by the central bank see no sign that annual inflation will slow to the 3% target before 2027.
--With assistance from Franco Dantas.
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